Productivity Transformation

The employment and output data were combined to make assessments of the speed of structural adjustment in sub-Saharan Africa compared with Asian countries, through the productivity lens. The process of structural transformation—a cause and consequence of growth—necessarily generates increases in average labor productivity, resulting in higher earnings per worker. This happens either through gains in productivity in individual sectors—which can increase or decrease the average productivity dispersion in the economy depending on which sector gains relative to the others—or through workers moving from low-productivity activities to higher-productivity activities. The latter channel generates a more inclusive growth process, as the share of workers at the bottom of the earnings distribution begins to shrink.

Previous work on the issue of productivity convergence has shown that in almost all economies, agriculture is the lowest-productivity sector, followed by services, with industry as the highest-productivity sector (Bah 2013; McMillan and others 2014). In terms of relative country comparisons, de Vries, Timmer, and de Vries (2015) have shown that the productivity level in manufacturing in Africa has deteriorated slightly relative to the United States since 1990, whereas for Asian countries the long-term trend has been fat. This paper’s analysis for selected countries in sub-Saharan Africa for the past decade supports some of the literature, but unlike these authors, it excludes upper-income countries and focuses only on low- and lower-middle-income countries.1

The comparative analysis of the productivity transformation starts with the labor reallocation element. Figure 6 plots initial period sector productivity levels relative to the economy-wide average against changes in the sectoral employment share. Countries transforming show the share of employment contracting in the lowest-productivity sector, agriculture (point in the lower left-hand quadrant), and employment expanding in relatively higher-productivity sectors (points in the upper right-hand quadrant). In most countries, the level of productivity in the industrial sector is above all other sectors (Zambia being an exception), but unfortunately for these African countries, there has been little shift of the employment share into this sector because all of the data points for industry are straddled close to the horizontal line. Employment in the industrial sector has grown only at about the rate of growth of the labor force (which represents good employment growth, but not transforming growth). The employment shift out of agriculture has predominantly gone to services. This is especially the case for Ghana, Rwanda, Senegal, and Tanzania, with annual increases in the employment share of between 1 percent and 2 percent. This shift generated some employment transformation, but not as much as might have been hoped given the growth rates. The modest performance of industry in absorbing employment is, however, consistent with the view that the influx of capital to finance industrial activities remains weak among sub-Saharan African economies. Obviously, the highest-productivity sector needs the most capital and technology to expand.

Figure 7 shows the relative productivity shifts. Agriculture would be expected to appear on the left-hand side, because initial productivity was low. If employment declined rapidly enough, this combined with positive sector growth should lead to a positive change in relative labor productivity and the country would appear in the upper half; if not (or if productivity growth in the other sectors was so dramatic that agriculture was still behind), the country would show up in the lower half. In these sub-Saharan African countries, agriculture labor productivity has improved slightly relative to other sectors, although there are a lot of observations around zero, and in a few countries relative productivity fell because the other sectors gained faster. The more troubling feature is the high gain in relative productivity in industry in some countries. While some absolute gain in productivity may be desirable, what is not ideal is for industry to pull away from the other sectors. As Timmer (2008) shows, this necessarily leads to lower labor absorption. Nigeria is one country that shows substantially declining relative labor productivity in industry, reflecting the diversification of this still small sector of the economy away from highly capital-intensive mining. Services meanwhile had a decline in productivity relative to the average, which is to be expected given the expansion of lower-productivity self-employment, which is where the majority of the employment transformation happened.

How does the historical experience of the African countries compare with the performance of the low-income Asian economies? Historical data for Bangladesh, Cambodia, and Vietnam over the 2000–10 period (Figures 8 and 9) reveal the strength of employment growth in industry and services for the south and east Asian countries relative to average growth.

The change in employment shares for both industry and services for these countries is higher than for almost all of the sub-Saharan African countries with the exception of services employment growth in Ghana, Senegal, Rwanda, and Tanzania (Figure 8 compared with Figure 6). This result was possible for a variety of reasons:

There was a very labor-intensive pattern of growth in industry, with annual industry employment growth rates between 6 and 8 percent for Bangladesh and Vietnam and almost 20 percent for Cambodia. This compares with an average employment growth rate of 4 percent per annum for low-income countries with limited natural resources in sub-Saharan Africa.

A much lower labor force growth in the Asian economies meant that a lower share of labor got stuck in agriculture.

Even though overall productivity rose rapidly, the strongly labor-intensive growth in industry and services actually dragged down relative productivity slightly in these sectors (the data points for these sectors are found in the lower right-hand side of Figure 9).

These patterns have led to a convergence in relative productivities between sectors in the east Asian countries. Countries with stronger employment growth (Cambodia, Vietnam) have experienced a larger relative decline in productivity in the sectors with strong growth. In addition to the strong employment performance, convergence in productivities between the sectors also helps lower overall income inequality if earned income is a large share of household income and earnings are related to labor productivity.

What explains why so many jobs were created in the industrial sector in the Asian comparator countries? One factor is not a difference in productivity levels across countries (Figure 10). For the productivity level comparison, sector outputs are expressed in a common currency by using 2010 purchasing power parity (PPP) exchange rates. The resource-rich countries are excluded to limit the effects of differences in industrial structure on the analysis, but LICs and LMICs are combined. The use of PPP exchange rates allows the productivity estimates to be expressed in a common unit and adjusted by differences in prices over time. The basic assumption is that the real exchange rate is driven by differences in prices.2

Figure 10.Selected Countries: Industry Productivity

In both industry and services, the levels of productivity in a common currency are very similar between the Asian countries and the non-resource-rich LICs and LMICs in sub-Saharan Africa, with only Bangladesh having a slightly higher level of productivity (Figures 10 and 11). It appears that the ability of the Asian economies to attract large amounts of foreign direct investment (FDI) and generate so much industry employment must lie elsewhere in terms of lower wage costs and other logistical factors.3,4 These results differ somewhat from the picture presented in de Vries, Timmer, and de Vries (2015) and Rodrik (2015), and may reflect differences in the composition of the Asian countries since the other analyses include the highly productive Asian emerging markets and are limited to manufacturing rather than industry.

Figure 11.Selected Countries: Services Productivity

In sum, between 2000 and 2010, the share of employment in the more productive sectors expanded rapidly in Asian LICs and LMICs, explaining the rapid structural transformation observed in these countries. In Africa, the transformation was more muted because the relative share expanded in services rather than industry. In most sub-Saharan African countries, sectoral productivity differences did not widen very much; few countries appear in the upper quadrant of Figure 7. But it is noteworthy that in the Asian comparators, the sectoral productivity differences narrowed.

There has been some argument that the use of aggregate PPPs is incorrect because of differences in relative prices between sectors, but since these are estimated with such wide error margins, using the aggregate PPPs is preferred.

The figures on the level of productivity are confirmed by independent estimates from the U.S. Conference Board, which show that aggregate productivity in Vietnam and Cambodia is about a fifth of the level in South Africa.